EMU, the Politics of Wage Inflation, and Crisis

EMU, the Politics of Wage Inflation, and Crisis

Alison Johnston

Publisher:

Cornell University Press

DOI:10.7591/cornell/9781501702655.003.0007

This chapter explores how the European Economic and Monetary Union (EMU) created a regime with a low-inflation bias that was advantageous to its northern economies. It considers how Europe's full-scale economic crisis revealed the fissures of an incomplete monetary union, as well as the lessons learned from Europe's sovereign debt crisis about the adverse economic consequences that result when merging diverse labor markets into a single currency. It examines why rigid labor markets have been so successful under monetary union, arguing that the key was how they promoted the continuation of sectoral labor market politics that are conducive to producing (severe) wage moderation under monetary union. The chapter also discusses two competing theories that explain whether diverse national systems can coexist under common pressures of globalization, along with the ways that EMU altered political dynamics within its member-states' real exchange rates. Finally, it proposes policy solutions for EMU's current crisis.

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